Mortgage Interest Deductable?

[Goodfella]

What is the name of your state? Hawaii

In 2000, we purchased our house from our landlord by signing an Agreement of Sale and a Note for the purchase price and interest rate. This was strictly between us and the landlord, who then became our mortgage holder.

No transfer of title ever took place until 4 years later when we refinanced and paid off the landlords note.

My question: Is the interest that we paid under the terms of the original Note deductable even though there was no transfer of title?

ThanksWhat is the name of your state?

 

[seniorjudge]

What is the name of your state? Hawaii

In 2000, we purchased our house from our landlord by signing an Agreement of Sale and a Note for the purchase price and interest rate. This was strictly between us and the landlord, who then became our mortgage holder.

No transfer of title ever took place until 4 years later when we refinanced and paid off the landlords note.

My question: Is the interest that we paid under the terms of the original Note deductable even though there was no transfer of title?

ThanksWhat is the name of your state?

You didn't have a mortgage, so you can't deduct any interest.

www.irs.gov/pub/irs-pdf/p936.pdf

 

[Goodfella]

Can of Worms

You didn't have a mortgage, so you can't deduct any interest.

www.irs.gov/pub/irs-pdf/p936.pdf

Well...that's pretty clear.

It appears we may have gotten some incorrect advice from our tax guy.
What should we do in this situation if we did claim the interest deduction? Wait to see if it they catch it? Or admit the mistake and take the consequences?

 

[PghREA]

You didn't have a mortgage, so you can't deduct any interest.

www.irs.gov/pub/irs-pdf/p936.pdf

I disagree. Post this on the tax forum and see what the tax people say.

 

[seniorjudge]

I disagree. Post this on the tax forum and see what the tax people say.

And let me know what they say.

 

[Goodfella]

I disagree. Post this on the tax forum and see what the tax people say.

Okay...I posed the question to the Tax forum and received the following response from LdiJ:

"Yes, it would have been deductible in the years that it was paid. You had a valid "land contract" or "mortgage contract". However, its too late now for 2000 and 2001 and it will be too late for 2002 after April 15th this year. (if you are considering amending past year returns)"​

That's great news since I had been taking the deduction since we bought the house in 2000.

 

[pojo2]

That's great news since I had been taking the deduction since we bought the house in 2000.

I hate to burst your bubble but SJ is correct you may not deduct the interest for the years prior to your getting the refi.

You said this was "strictly" between you and the landlord so I am assuming the paperwork was never filed anywhere. If my assumption is incorrect I apologize for the momentary panic I have caused you.

So the question is was this transaction ever recorded in your county prior to your refi?

 

[PghREA]

Okay...I posed the question to the Tax forum and received the following response from LdiJ:

"Yes, it would have been deductible in the years that it was paid. You had a valid "land contract" or "mortgage contract". However, its too late now for 2000 and 2001 and it will be too late for 2002 after April 15th this year. (if you are considering amending past year returns)"​

That's great news since I had been taking the deduction since we bought the house in 2000.

The answer you got from the tax forum is the one I agree with. (this is from years of working with my CPA spouse.

From IRS Publication 523:

Seller-financed mortgage. If you sell your home and hold a note, mortgage, or other financial agreement, the payments you receive generally consist of both interest and principal. You must report the interest you receive as part of each payment separately as interest income. If the buyer of your home uses the property as a main or second home, you must also report the name, address, and social security number (SSN) of the buyer on line 1 of either Schedule B (Form 1040) or Schedule 1 (Form 1040A). The buyer must give you his or her SSN and you must give the buyer your SSN. Failure to meet these requirements may result in a $50 penalty for each failure. If you or the buyer does not have and is not eligible to get an SSN, see the next discussion.

The above paragraph refers to what the Seller is suppose to do and I know that we are responding to the Buyer. . . . . . the seller is required to send a 1098 (mortgage interest) to the buyer each year.

 

[Goodfella]

I did indeed receive a 1098 from the seller each year prior to the re-fi.

 

[pojo2]

You are missing the point. If this was never recorded then the interest is NOT deductible!

That is the only relevant fact here and the OP refuses to answer that question. So based on the fact this was between he/she and the seller "strictly" then the interest, in this case, is not deductible.

Again if I am misunderstanding that phrase then please clarify.

Why are you bringing this issue up now?

 

[Goodfella]

Just so we're clear. I didn't refuse to answer the question.

This is from my original post:

No transfer of title ever took place until 4 years later when we refinanced and paid off the landlords note.

 

[Goodfella]

Why are you bringing this issue up now?

The reason I bring up the issue now is because of a nagging feeling that I didn't get good tax advice 5 years ago and have since taken a mortgage deduction for 3 years that could be disallowed if I were to get audited.

Which brings me to my next question: If the deduction is NOT allowed, and I took it for three years, should I inform the IR S, or do nothing and hope it never comes up?

 

[PghREA]

You are missing the point. If this was never recorded then the interest is NOT deductible!

TQUOTE]

And what IRS tax publication did you read that stated that a seller financed mortgage had to be recorded for the interest to be deductible?

 

[seniorjudge]

You are missing the point. If this was never recorded then the interest is NOT deductible!

TQUOTE]

And what IRS tax publication did you read that stated that a seller financed mortgage had to be recorded for the interest to be deductible?

Look on page #2

http://www.irs.gov/pub/irs-pdf/p936.pdf

My first post was correct...somebody tell LDiJ....

 

[pojo2]

Which brings me to my next question: If the deduction is NOT allowed, and I took it for three years, should I inform the IR S, or do nothing and hope it never comes up?

Only you can make that decision, but knowing it was not right, I do feel better than the seller did issue the 1098 and paid taxes on the interest received. That is not legal, moral or any other advice.

Thanks SJ for providing the info to the other poster.